Mumbai: Snapping a two-session upmove, the rupee on Tuesday weakened by two paise to 54.58 against the dollar due to renewed demand for the US currency from importers and continued capital outflows amid weakness in local equities.

However, a sluggish dollar overseas capped rupee's fall to some extent, forex dealers said. The local currency commenced the day's trade on a firm note at 54.49 against the dollar from Monday’s close of 54.56 at the Interbank Foreign Exchange (Forex) market.

Later, it hovered in a volatile range of 54.41-54.65 before settling down at 54.56, a fall of two paise over its previous close. Meanwhile, foreign institutional investors continued exiting Indian stocks and sold shares worth over USD 121.8 million (Rs 664.90 crore) on Tuesday, according to provisional BSE data.

The BSE benchmark Sensex fell over 211 points to end at seven-month low of 18,226.48. "The rupee today fell in line with weak equities. After the Cyprus issue, investors are cautious about investing in emerging market economies... Thus, we have been witnessing a flight of FII money from the markets, which hurting the rupee," said K Hariharan, Treasurer at First Rand Bank.

The dollar index, a gauge of six major global rivals, was down by 0.2 percent. Hariharan said that very high forward premiums are making it tough for debt markets to attract money, so the rupee is likely to move in the 54.25-55.50 range in near term. But the export data to be announced later this week will decide the future course of rupee's movement.

"The negative stock markets put additional pressure on the rupee. Since last couple of days, the FII's have been the net sellers, which is a negative sign for the markets as well as for rupee," said Abhishek Goenka, Founder and CEO, India Forex Advisors.

Meanwhile, the premium for the forward dollar declined further on sustained receivings by exporters. The benchmark six-month forward dollar premium payable in September settled lower at 187-189 paise from Monday's close of 190-192 paise.

Far-forward contracts maturing in March also moved down to 362-364 paise from 364-1/2-366-1/2 paise. The RBI fixed the reference rate for the US dollar at 54.4613 and for euro at 70.9875. The rupee recovered slightly against the pound sterling to 83.50 from overnight close of 83.53 while improved further against the Japanese yen to 55.15 per 100 yen from 55.32. It, however, eased further against the euro to 71.17 from 71.04.